Monometallism and Bimetallism
( Originally Published Early 1900's )
WE assume, in starting, what will be more fully shown hereafter, that at the base of every sound system of currency must lie a right of the holder of bank-notes or other forms of paper currency to demand a definite quantity of something having value in exchange for his notes. We have seen that practically the precious metals are the only commodities which have hitherto been extensively used for this purpose. We have also seen (Book II., Chapter XII.) that the rival monetary systems of the present day among the leading commercial nations are monometallism and bimetallism.
Monometallism is the system under which a government coins only a single metal as unlimited legal tender. Theoretically this metal may be gold or silver, but practically it is only gold among the leading monometallist nations of Europe. The bimetallic system permits the unlimited coinage of either gold or silver. It also permits payment to any amount to be made in either metal at the pleasure of the paying party.
We have now to consider the relative effects and practicability of the adoption of these two systems. Before proceeding to this discussion it is essential that the student should have the facts of the case clearly in mind as they have been set forth in the chapter already referred to. He will then understand the following statement of the point at issue between the two parties. We begin with the views of the bimetallist.
The Bimetallist View. The ground taken by the bimetallist is that if the leading nations will only agree to coin silver and gold at any uniform ratio of value previously agreed upon, the market value of the two metals will necessarily correspond to this ratio. Suppose, for example, that it is agreed that the silver dollar shall weigh sixteen times as much as the gold dollar; that is, that government establishes the rule that for monetary purposes the ratio of the value of gold to that of an equal weight of silver shall be 26 : 1. Then, says the bimetallist, if there is a large increase in the silver-supply without any increase in the gold-supply, this increase cannot result in any great fall in the price of silver as compared with gold, because people will then coin silver rather than gold, and thus the surplus will all be absorbed in the in-crease of the silver money. If, on the other hand, silver becomes comparatively scarce as compared with gold, the only result will be that gold rather than silver will be coined; and since a dollar of either metal will equally answer the purpose, no preference can arise for one over the other. A condensed statement in its extreme form is as follows:
" The abundant metal is the least demanded. Its tendency is to be depreciated, while the scarcer metal becomes dearer. But it is evident that if to increased production we can continue to oppose increased demand, and to decreased production decreased demand, we shall maintain the equilibrium and things will remain unchanged. This is precisely what we pro-pose to do. For the demand, which, without the adoption of the tariff of 15., would be directed to the metal which is scarce, would, if the tariff were anywhere in force, be directed to the metal that is abundant. For if the bimetallist law permits each and every one to pay his debts at will in gold or silver, every one must see that the dealers in money will neglect the metal which is hard to find, and will seek for that which is plentiful, to have it coined. Moreover, the scarce metal, if it is not in demand, will not rise in price, and the abundant metal, if active demand springs up, cannot fall."
The Monometallist View. The ground taken by the monometallist is that the permanent use of two metals as money is impracticable. There is in the great markets of the world a certain ratio between the value of a definite weight of gold and the value of an equal weight of silver which fluctuates from year to year with the supply and demand of the two metals. Assume the ratio 16 :1 to be adopted. If the value of gold becomes greater than that of sixteen times its weight in silver, the latter, being the cheaper metal, will be preferred in payment. Consequently the paying party will not pay in gold at all, but will send silver to the mint for coinage in order that he may make his payments in silver. The result will be that gold will disappear from circulation entirely, and we shall not have bimetallism, but silver monometallism.
If, on the other hand, gold is worth less than sixteen times its weight of silver; if, for example, the market ratio is 15 :1, then for the same reason silver will stop circulating as money, and we shall have gold monometallism. The result is that the system of bimetallism really results in a fluctuation between one form of monometallism and another according to the supply and demand of the two precious metals thus causing unlimited confusion in the course of trade.
Criticism of the Argumente. We need not inquire which of these arguments is the stronger, because each of them is insufficient, owing to its being founded on one side of the case and containing no suggestions how the other side is to be taken into account. Each side cites a true cause as the basis of its view, and the only way in which a decision can be reached is by weighing each cause and thus learning which preponderates. This cannot be done with entire precision, because the result depends upon matters of fact about which our knowledge is extremely limited. It is, however, easy to show how the weighing of the two causes should be conducted.
The arguments of the bimetallist would be perfectly sound if the precious metals had no other use than that of being coined into money. In such a case, whatever the monetary ratio, one kind of r a dollar would serve the purpose as well as another, even though there should be fifty silver dollars in circulation to one of gold. This comparative scarcity of gold would no more increase the value of gold dollars than the scarcity of a particular kind or tint of gold would increase the value of that kind of gold.
But, as a matter of fact, the precious metals have other uses than this, and the fallacy of the bimetallist consists in ignoring that fact, or rather in claiming, without fully proving the claim, that the result of. these other uses is insignificant, It is quite possible that not more than half the gold and only a small fraction of the silver which is now in the world is in use as money. Wares, jewelry, picture-frames, spoons, the filling of teeth, and plate of all kinds continually absorb it. Hence the weight of gold in a gold dollar may have a higher market value than the weight of silver in a silver dollar, or vice versa, according to the demand for the two metals. In such a case, by Gresham's law, the owners of gold coin will no longer use it wholly as money, but will begin to use it for other purposes. The converse will hold true if silver becomes more valuable in the market.
On the other hand, the monometallist is at fault if he claims, without proof, that under the bimetallic system either all the silver or all the gold necessary for the world's circulation could be coined without changing the market ratio of the two metals. Let us suppose the two metals to be circulating as money in equal quantities on a universal bimetallic system. Then grant that one of them, say silver, is produced in such excess as to cause a fall in its market price. Before it can entirely take the place of gold in the circulation, enough of the excess must be coined to replace all the gold now in use as money, and an equal value of the latter must be withdrawn from circulation. It is certain that this cannot be done without some change in the market value. Whether the change would be such as to keep the market ratio of the two metals down to the legal ratio would depend upon how great was the excess of silver production compared with the amount which would be absorbed in the coinage. This involves questions of fact, to be settled by learning the actual state of the case.
The whole question turns upon how the influence of the demand for the precious metals for other purposes than that of money compares with the influence of their demand for the purposes of coinage. To consider the question from this point of view we must first point out a great difference between what constitutes the supply of the precious metals and what constitutes the supply of most other commodities. As we have hitherto used the term supply, it has meant the quantity of a commodity brought to market during some definite unit of time, commonly a year. The reason of this is that nearly all commodities reach the hands of the persons who are finally to enjoy them, and are thus out of the market, within a comparatively brief period of their production. Most of the wheat, clothing, and furniture manufactured is sold, and in the hands of some person who is keeping it for his use, within a year of its final production. In the case of more permanent objects, such as houses and farms, although they may be in the possession of persons owning and using them, they are still to a certain extent in the market for sale or rent, so that the supply is not strictly an annual one. In the case of the precious metals the supply is yet more permanent, because so long as they are used as money they never get into any hands which are going to keep them, but remain continually in the market.
Hence the supply of gold dollars does not consist of those which have just been coined from the mint and are waiting to be paid out, nor of those coined within a year, but of the entire mass of gold dollars in the country and in the world. Among the gold may be included some that has been passing from hand to hand since the days of the Caesars. Thus the actual supply of the precious metals is vastly greater than the amounts annually produced. Hence it. is that their value is less dependent upon current production than in the case of any other commodity. If a hundred millions is extracted from. the gold-mines of the world during a year, it is only added to a vastly greater existing amount, and thus produces little difference in the total supply.
Let us return to the definite proposition of the bimetallists : If the leading nations of the world should agree to coin silver and gold without limit on any assumed ratio, the result would be to bring the market ratio down to that of the coinage.
Let us see whether we can test the correctness of this proposition. For ten years past the market ratio has very generally been about 18 : 1. What now will be the consequence of offering to every owner of silver the privilege of having it coined into money which shall be relatively more valuable in the ratio cf 18 : 15 ? Evidently there will be an effort on the part of the owners of silver to get it coined, while gold coinage will, for the time, cease. The demand thus created will increase the value of silver and diminish that of gold, thus lowering the market ratio. Will it, as the bimetallist claims, lower it to the ratio 15 ? Clearly not, because if it did there would no longer be any incentive to take it to the mint for coinage. The market ratio will therefore stand somewhere between 15 and 18. The exact point at which it would stand would in the first place depend upon the capacity of the mints to coin a considerable portion of the existing supply of silver bullion. The amount of this supply we cannot precisely estimate, but it must be several hundred millions of dollars. It is indeed so large that the coinage since 1878 of from thirty to forty mil-lions annually by the United States Government seems to have been without any visible effect upon the silver market. It seems, therefore, safe to assume that were the bimetallic theory tested, all the mints of the world would be employed to their utmost capacity for a period of several years in coining silver.
Now consider the case of gold. The same reasons which would stimulate the coinage of silver would entirely paralyze that of gold. Thus the annual supply of the latter metal would be thrown upon the market for use in the arts and manufactures. To what extent would this lower its value as compared with silver? To some extent, no doubt; but we cannot tell to what extent without more knowledge than we have of the actual amount of gold in the world and the actual demand for other purposes than that of coinage.
Would the exclusive coinage of silver be continued until that metal alone was the basis for the money of the whole world? This would depend upon whether all the silver in the market, and all that could be produced and taken to the mints during the few years that the coinage was going on, would suffice for the money of the world. We do not know whether it would suffice or not, and thus we do not know exactly what the outcome would be. We could learn by a statistical investigation, but even that might not convince the contending parties.